The Tea Party's Circular Logic
Its revolt undermines the private sector more than it reins in "big government."
The irony of the Tea Party revolt, of course, is that it undermines the private sector more than it reins in "big government." The S&P downgrade resulted in a "flight to quality," meaning that investors bought U.S. government debt—thus increasing its price and lowering the rate that the federal government pays to borrow.
It was the value of the stock market that fell sharply—which makes sense, given that countercyclical policy is now severely constrained. The government part of the credit system has been strengthened, relatively speaking, by developments over the past few months. It is the private sector—where investment and entrepreneurial activity are needed to generate growth and employment—that has taken a beating.
Unless and until America's private sector recovers, investment and job creation will continue to stagnate. But today's atmosphere of fear and aggressive budget tactics are combining to undermine private-sector confidence and spending power.
As Jonathan Swift put it in 1727, "Party is the madness of many, for the gain of the few."
This article comes from Project Syndicate.
Simon Johnson is a professor at MIT’s Sloan School of Management and the co-author of White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You.
Photograph of Michele Bachmann by Scott Olson/Getty Images.